About that Pulte-Centex deal...

Like many other people working in the building industry, I was fairly surprised at today's announcement that Pulte Homes was buying Centex. So what do other analysts think, how did the market react, and what are the concerns?

First, from a story at BigBuilderOnline.com:

After taking in the potential implications of the announcement, overall, analysts said they think Centex needs the deal. "We view this deal as a necessary and positive step for CTX given its 56% leverage, $1.2 billion of debt maturities over the next three years, and our expectation for weak cash flow," said JMP Securities vice president Hector Calderon...

Pulte needed the deal as much as Centex, said Stephen East, analyst with Pali Capital. "They had too much in the Del Webb brand, and they are long on land," East said. "Getting with Centex helps them in land, gets them into the entry-level market, and gets them better volumes... . Overall, it is a good fit culturally and geographically."

The price of the deal was good for both, said East. "Centex saved face by getting one times book and Pulte did okay because they didn't pay over book."...

Will the deal trigger more big players to rush to the altar? Most analysts say no. But Patrick Duffy, principal at MetroIntelligence Real Estate Advisors, said there may be upcoming pressure by stockholders for other builders to put out the feelers...

And what about the debt load? Also from Big Builder magazine staff:

The proposed merger of Centex Corp. (NYSE:CTX) into Pulte Homes Inc.(NYSE:PHM) will create not only the nation's largest builder but the largest home building debt load, estimated at roughly $6.2 billion.

The combined entity would have a 61% ratio of debt to total capital, actually an upgrade for Centex, which at yearend 2008 was at 69.3%, but a step down for Pulte, which was at 52.8%.

The three major credit ratings agencies reacted swiftly to news of the proposed deal. Fitch was the most bullish, Standard & Poor's less so. Moody's warned of a possible downgrade. Both Pulte and Centex debt were previously rated as junk and remained so after the ratings updates...

Joseph A. Snider, a VP and senior credit officer with Moody's, said the notice of review did not necessarily mean another downgrade. But he said the agency's concern centers around one big issue: land.

"When one home builder buys another home builder, they're essentially just buying the land," said Snider. "Pulte already has a ton of land. Too much land."

Even in light of the slightly positive news that has emanated from the housing market in recent weeks, Snider sees the deal as "somewhat risky. We've taken note of these [positive] numbers. We hope those glimmers of hope are confirmed. But it's way too premature to say that we've reached the bottom."

I would certainly agree with that sentiment.

However, the deal will surely bring both companies a huge boost in market share -- something which was already a fait accompli for large builders coming out of this downturn.

From a BuilderOnline.com story:

As Pulte and Centex executives sell their pending merger to shareholders and others, they have noted that the combined entity will have a top-3 spot in 25 of the 50 largest housing markets in the country.

But that only hints at the factors--and potential influence of a combined Pulte/Centex in metros around the country--involved in this inherently local aspect of this national housing story, where the deck of players in numerous markets is about to be reshuffled, thanks to this pending merger...

According to an analysis of BUILDER's annual Local Leaders report, the new Pulte will exert a major influence in a number of additional housing markets across the board, from perennial powerhouses such as Atlanta and Phoenix to mid-packers such as Charlotte and Raleigh, N.C., which experienced neither the major boom nor the major bust of recent years...

Many former Top-10 builders in these major markets have filed for Chapter 11 bankruptcy or even liquidated, leaving them weak, if not nonexistent, competition for Pulte. For example, two of the top 10 builders in Las Vegas according to last year's Local Leaders were Kimball Hill Homes, which announced in December it would stop operating, and the Woodside Group, which earlier this year proposed turning itself over to its creditors.

And some of these markets are seriously hurting. Las Vegas, Phoenix, and Riverside-San Bernardino have been experiencing record levels of foreclosures, which have dramatically impacted new-home demand and pricing. When these markets rebound, Pulte may be well-positioned for their recovery, but until then, these market-share gains also represent greater exposure to the housing downturn.